Will local control of Council Tax Benefits work? by the Institute of Fiscal Studies

Council Tax Benefit (CTB) provides support to 5.9 million low income families, more than any other means-tested benefit or tax credit in the U.K.

In April, CTB will be abolished across Britain and grants will be given to local authorities in England to design their own systems of council tax support. The Scottish and Welsh governments will also receive grants.

These will be set at 90 per cent of what would have been spent under the current system, saving the government around £500 million a year.

We have analysed the effects of these proposals in some detail and have concluded that localisation would create considerable complexity just when Universal Credit is being rolled out with the intention of simplifying things.

The change could also undermine many of the improvements to work incentives that Universal Credit is intended to deliver.

For councils to save the full ten per cent by which funding is being cut, either the means test would have to be so severe that some people would be worse off after a pay increase, or councils would have to collect some local tax from the very poorest for the first time since the poll tax.

Last minute changes

Many councils have proposed schemes that would have those sorts of consequences.

In October last year – two years after the policy was originally announced, less than four months before local authorities had to finalise their new schemes, and only a week before the third reading of the bill in the House of Lords – new proposals were forthcoming. A £100 million package was announced in a ministerial statement. That money, which amounts to a fifth of the total planned savings, will be available to councils whose schemes meet a particular set of criteria that the government considers “best practice”. It will, apparently, be available for one year only. Councils will be eligible for the money under certain conditions:

Nobody who is currently on full CTB ends up paying more than 8.5 per cent of their council tax liability (in practice, because of the cost of collecting such small amounts from very-low-income households that are not used to paying council tax, councils may prefer to give a full rebate to such households);

The rate at which the benefit is withdrawn as income rises is no higher than 25 per cent (as compared with 20 per cent currently); and

There are no “cliff edges” (where entitlement suddenly drops when income exceeds a particular threshold).

Even with an extra £100 million to soften the blow, it is hard to see how most councils could design schemes that meet these criteria with the reduced funding intended for council tax support.

Therefore, it appears the government is aiming to pay councils not only to design schemes that the government likes, but to design schemes that don’t cut support as much as the councils’ funding is being cut, leaving them to make up the shortfall from elsewhere in their budgets.

It is hard to square this development with a policy whose stated goal is to devolve responsibility.

And it is unclear why the additional money should be appropriate in the first year of the policy and not later.

But perhaps of most concern is what this says about the policymaking process.

The potential downsides that the government seems to be trying to ameliorate – losses for the poorest households and the weakening of work incentives – have been obvious to many observers for a long time. Yet this announcement has come late in the process.

The case for well-thought-through reform of the welfare system is overwhelming. The dangers of less fully considered reform – as this one appears to be – are considerable.

A version of this article was originally published as an “Observation” by the Institute for Fiscal Studies.